Comments on: Don’t invest in microfinance

By: AsifurRahman

AsifurRahman — Thu, 14 Jan 2010 09:24:48 +0000

Investment of PE in MFIs is a must. Otherwise micro-finance industry would never be able to serve 4 billion people at BOP globally. There are number of instances where MFIs became sustainable in a reasonable time frame and started generating profit.

Now at the early days there might be some hick up. But does not justify the urge like “don’t make investment in MFI”.

By: Jessie

Jessie — Fri, 28 Aug 2009 07:58:23 +0000

Felix, interesting blog. I work in microfinance and agree with you that too much growth too fast is a risk with a number of MFIs. Nonetheless, there are many cases where external support, including loans and equity, are the only option for MFIs to work at all.
Grameen didn’t borrow from abroad because it isn’t allowed to; Bengladeshi law does not allow it. It was however permitted to collect savings locally, something which is not permitted in many coutnries. And since microfinance can be quite risky, in many cases I prefer to see the funds of international lenders be put to risk, rather than the savings of local people who have nothing to spare and no way of protecting themselves.

By: Edward Moore

Edward Moore — Fri, 28 Aug 2009 01:48:28 +0000

A very interesting blog entry, Felix. I’m in São Paulo at the moment researching my dissertation about the Microcredit industry here in Brazil. As you’ll no doubt be aware, the microcredit industry here, for a number of reasons, is massively underdeveloped despite a huge demand for funds from its sprawling informal sector. Microfinance loans are served mainly by public banks but everything I have read has, until now, convinced me that Brazilians’ demand for credit will only be satisfied with the assistance of the private sector. This will only happen, however, if the government reduces its participation substantially. What are your thoughts on this? There’s clearly not enough money in the public coffers to fulfill the demand for credit, so what is your solution if you believe private investment likely to cause a bubble?

Any ideas on avenues for Brazil-specific research much appreciated from anyone at all. My e-mail address is edward_dot_moore_at_gmail_dot_com.

By: ashley alfred

ashley alfred — Thu, 20 Aug 2009 09:59:36 +0000

There has also been much criticism of the high interest rates charged to borrowers. The real average portfolio yield cited by the a sample of 704 microfinance institutions that voluntarily submitted reports to the MicroBanking Bulletin in 2006 was 22.3% annually. However, annual rates charged to clients are higher, as they also include local inflation and the bad debt expenses of the microfinance institution. Microfinance institutions that charge more than 15% above their long-term operating costs should face penalties.

By: Nicole

Nicole — Mon, 17 Aug 2009 20:06:53 +0000

Felix, as someone in the microfinance field, I think this article is pretty misleading since you are oversimplifying several issues and the arguments seem circular.

(1) Foreign exchange risk is rarely borne by borrowers. And even in the instances where borrowers do take loans in USD (primarily in a handful of dollarized Latin American countries), if their country currency devalues there is generally upheaval in the domestic economy that is going to make it impossible to repay the loan, so borrowers will default and investors will lose their investment. This is generally fear since US investors can generally diversify their currency risk.

If this seems worrying, you should *want* microfinance banks to hedge currency exposure (which many do) with the help of orgs like Kiva. It is counterintuitive that you criticize such efforts.

By: Evan

Evan — Fri, 14 Aug 2009 21:13:20 +0000

Here’s a link to the extensive blog post that Kiva did addressing this:
http://kivanews.blogspot.com/2009/06/new -kiva-feature-currency-risk.html

Here’s what they decided to do:

1 – Kiva Field Partners will now have the choice to “opt-in” to this feature; they can choose to manage all Foreign Exchange Risk themselves, or – by opting into the Feature – pass on the risk of currency devaluation over 20% to Kiva Lenders.

2 – You can see which loans have opted into the Foreign Exchange feature on the business page on the right side of the page under “About the Loan” in a section called “Currency Risk,” which has three statuses:

* Covered – If the Field Partner has not opted-into currency risk sharing
* Possible – If the Field Partner has opted-into currency risk sharing
* N/A – If the Field Partner does not disburse funds in a local currency (if they disburse U.S. dollars).

3 – Once a Field Partner has opted into this feature, the Foreign Currency Risk will only be shared with Kiva Lenders for new loans. All loans which have already been added to the Kiva site – whether they have already been funded, whether they are still being funded or whether they are yet to receive funding – will not expose you to the risk of losing funds via currency losses. So, you always have the choice to lend to businesses that have a possibility of foreign currency devaluation over and above 20%.

By: Jeff

Jeff — Fri, 14 Aug 2009 17:41:55 +0000

This is where I give as an alternative to going the microfinance route. Though it only operates in the U.S. at this time, this orgs entirely different approach makes sense to me: http://www.modestneeds.org

By: nic

nic — Fri, 14 Aug 2009 07:09:54 +0000

Could someone please explain how lending at usurious rates to the pooresof the poor is “doing good”.

This isn’t charity, it’s business and we should stop treating MF as if it’s anything else…

By: Jack

Jack — Fri, 14 Aug 2009 06:03:13 +0000

You asshole this is a very misleading title. The problem lies with the investor only. When a grassroot MFI asks for funds these PE’s say they want only commercial MFI’s since governence and operationaly these MFI’s are not sustainable. Then how are you going to help grassroot MFI’s grow. How many investors are there who will invest in these kind of MFI’s. The socialy motivated Funders are too less in numbers and the funds they have also is very less when you compare the demand.

By: paul

paul — Fri, 14 Aug 2009 04:29:57 +0000

Hi Felix et al,

Appreciate the article and the thread.
Felix, one question – how do you propose to satisfy the need i.e. Assuming we accept CGAP’s estimate that the need for credit is c. $300bn and this is only c.15% satisfied, then we’re a few bucks short … how do you propose to fill the gap? It’s not going to come from savings or charity – well at least not within the next generation or two … any ideas? other than the e.g. Oikocredit “blended value” investment model?

By: Bala K

Bala K — Fri, 14 Aug 2009 01:21:10 +0000

Everyone is responsible for the crisis. Govts. and regulators’ incompetencies continue to create and perpetuate poverty. Banks are making a ton of money lending to MFIs, but are not doing any real assessment, control or coordination of the way their funds are applied, often by multiple MFIs in the same market. Equity investors are in it for the growth story. There are few real social investors – after all, social investing means that you trade in financial returns for social returns, but most of the so-called social investors are still looking for commercial returns. MFIs are in it for the bucks – they think their balance sheets will be stronger, and of course its money in their pockets.

But where to invest all this excess cash? A socially motivated MFI, looking to benefit the poor, will be more concerned to address underserved, tough to reach markets. But there is a high correlation between eagerness to get commercial capital and lessened emphasis on social mission – under the gun to deliver ‘performance’, these are the folks who address the easiest markets, which is urban, or rural cannibalization where someone else already has a presence, since that makes service introduction easier.

And that leads to multiple lending.

By: John Yandziak

John Yandziak — Thu, 13 Aug 2009 23:59:24 +0000

Kiva responds on twitter -
@Kiva : @jyandziak He’s wrong. The stop-loss option is free for partners – no proceeds to pocket. Losses above 20% are passed to lenders.

By: Felix Salmon

Felix Salmon — Thu, 13 Aug 2009 20:30:53 +0000

Note that Kiva doesn’t say how much the stop-loss option costs, and pockets all the proceeds from selling those options for itself.

By: Sam Browning

Sam Browning — Thu, 13 Aug 2009 20:04:30 +0000

I did a little more research into Kiva, and it seems the currency risk is borne by the field partners (not the borrowers)in each country, and the field partners can limit their exposure through a stop-loss option. I found this in the Kiva field partner info:
—
Foreign Exchange Hedging Cost
This cost varies from country to country – all Kiva’s loans are in U.S. dollars. However, Kiva offers its MFI partners the ability to “stop-loss” their foreign currency risk. If an MFI chooses to enable currency exchange loss, it will not have to suffer the full impact of a revaluation of the $USD above a certain threshold. If the feature is chosen by the MFI, its foreign exchange loss is limited to a 20% revaluation of the $USD relative to the local currency. This means that the MFI partner would not have to repay more than an extra 20% in local currency relative to the amount disbursed, regardless of how severely the $USD revalues relative to the local currency. Any foreign exchange losses above the “stop-loss” threshold would be borne by Kiva lenders.
—
This would be similar to HeavyG’s proposal where the lenders would bear the currency risk (although not all of it). I wonder how many of the MFIs choose the stop-loss option. If they don’t, I would rather just donate to the MFIs directly.

By: Narsing

Narsing — Thu, 13 Aug 2009 19:06:05 +0000

Yes, the WSJ story is just the tip of an iceberg. The whole sector is trembling and in 3 months RBI will have a big crisis to handle. Ironically, 10 years after fly-by-night operators who collected deposits and vanished, we have here the poor people who have learnt the trick to collectively default on their payments, instead of committing suicides individually like farmers. Fine, let them also get a chance! Never in the human history did the poor get to have the cake and eat it too. At least this time it may come true. Risky investments should have the buffer to withstand or vanish.